Benefit-Cost Paradigms in Financial Regulation

Abstract

This paper builds on contributions to a Conference on Benefit-Cost Analysis of Financial Regulation, held at the University of Chicago, to show how benefit-cost analysis (BCA) of financial regulations should be conducted. Our major themes are that (1) on theoretical grounds, BCA should be easier for financial regulation than for other areas of regulation where it is already used, such as health and safety regulation; (2) while many needed valuations for BCA of financial regulation do not yet exist, those valuations are theoretically measurable; (3) once regulators commit to using BCA, economists will have incentives to work on supplying those valuations; (4) BCA will improve financial regulation and make it less vulnerable to judicial challenge; (5) the specific protocols or paradigms of BCA will differ across different areas of financial regulation; and (6) in the regulation of systemically important financial systems the primary trade-off is between risk that increases the probability of a crisis or leaves debts to the taxpayer against the profits generated by firms.